Month: November 2019

Closing Prices Highest to lowest

GBP/NZD 2.0129

GBP/AUD 1.9123

GBP/CAD 1.7157

EUR/NZD 1.7151

EUR/AUD 1.6291

EUR/CAD 1.4624

GBP/JPY 1.4155

USD/CAD 1.3273

GBP/USD 1.2926

GBP/CHF 1.2926

EUR/JPY 1.2061

EUR/CHF 1.1016

EUR/USD 1.1015

CHF/JPY 1.0951

USD/JPY 1.0948

AUD/NZD 1.0534

USD/CHF 0.9995

AUD/CAD 0.8980

NZD/CAD 0.8525

EUR/GBP 0.8519

CAD/JPY 0.8245

CAD/CHF 0.7534

AUD/JPY 0.7421

NZD/JPY 0.7046

AUD/CHF 0.6767

AUD/USD 0.6759

NZD/CHF 0.6423

NZD/USD 0.6417

Subtract Above pairs minus NZD/USD then Factor Mid Points

GBP/NZD – NZD/USD = 1.3273 = USD/CAD Close

GBP/AUD – NZD/USD = 1.2770 = GBP/USD and GBP/CHF

GBP/CAD -NZD/USD = 1.1787 No association found yet

EUR/NZD – NZD/USD = 1.1787 No Association Found

EUR/CAD – NZD/USD = 1.0520 = AUD/NZD

GBP/JPY – NZD/USD =1.0286 = Between USD/CHF and AUD/NZD

GBP/JPY 141.55 – NZD/USD = 71.09 = NZD/JPY 0.7046

USD/CAD – NZD/USD =0.9845 = USD/CHF

GBP/USD – NZD/USD = 0.9671 Between USD/CHF and AUD/NZD

GBP/CHF – NZD/USD 0.9671 = Between USD/CHF and AUD/NZD

EUR/JPY – NZD/USD =0.9239 between AUD/CAD and USD/CHF

EUR/CHF – NZD/USD = 0.8716 = Between AUD/CAD, NZD/CAD and EUR/GBP

EUR/USD – NZD/USD = 0.8716

CHF/JPY – NZD/USD = 0.8684 Between NZD/CAD, EUR/GBP and AUD/CAD

USD/JPY – NZD/USD = 0.8682 – Between NZD/CAD, EUR/GBP and AUD/CAD

AUD/NZD – NZD/USD = 0.8475 = Between CAD/JPY and EUR/GBP

USD/CHF – NZD/USD = 0.8206 = Between CAD/JPY and EUR/GBP

AUD/CAD – NZD/USD = 0.7698 Between CAD/CHF and AUD/JPY

NZD/CAD – NZD/USD = 0.7471 = Between CAD/CHF and AUD/JPY

EUR/GBP – NZD/USD = 0.7468 = Between CAD/CHF and AUD/JPY

CAD/JPY – NZD/USD = 0.7331 = Between AUD/JPY and NZD/JPY

CAD/CHF – NZD/USD = 0.6975 = Between NZD/JPY and AUD/CHF and AUD/USD

AUD/JPY – NZD/USD = 0.6919 = Between NZD/JPY, AUD/CHF and AUD/USD

NZD/JPY – NZD/USD = 0.6731 = Between NZD/JPY, AUD/CHF and AUD/USD

AUD/CHF – NZD/USD = 0.6592 = Between NZD/CHF and AUD/USD

AUD/USD -NZD/USD = 0.6588= Between NZD/CHF and AUD/USD

NZD/CHF – NZD/USD = 0.6420 = NZD/USD

Brian Twomey,

I never understood why governments switched from John Hicks IS/LM Model which lasted from 1937 -1997 to its present GDP calculations

(b) The rate of interest.

Income and the rate of interest are therefore determined together at the point of intersection of these two curves, i.e., E in Fig. 20.3. The equilibrium rate of interest thus determined is Or₂ and the level of income determined is OY₂.

At this point income and the rate of interest stand in relation to each other such that (1) the goods market is in equilibrium, that is, the aggregate demand equals the level of aggregate output, and (2) the demand for money is in equilibrium with the supply of money (i.e., the desired amount of money is equal to the actual supply of money). It should be noted that LM curve has been drawn by keeping the supply of money fixed.

Effect of Changes in Supply of Money on the Rate of Interest and Income Level:

Let us first consider what will happen if the supply of money is increased by the action of the Central Bank. Given the liquidity preference schedule, with the increase in the supply of money, more money will be available for speculative motive at a given level of income which will cause the interest rate to fall.

As a result, the LM curve will shift to the right. With this rightward shift in the LM curve, in the new equilibrium position, rate of interest will be lower and the level of income greater than at point E. With the increase in the supply of money, LM curve shifts to the right to the position LM’, and with IS schedule remaining unchanged, new equilibrium is at point G corresponding to which rate of interest is lower and level of income greater than at E.

Now, suppose that instead of increasing the supply of money, Central Bank of the country takes steps to reduce the supply of money. With the reduction in the supply of money, less money will be available for speculative motive at each level of income and, as a result, the LM curve will shift to the left of E, and the is curve remaining unchanged, in the new equilibrium position (as shown by point T in Fig. 20.4) the rate of interest will be higher and the level of income smaller than before.

Changes in the Desire to Save or Propensity to Consume:

Let us consider what happens to the rate of interest when desire to save or, in other words, propensity to consume changes. When people’s desire to save falls, that is, when propensity to consume rises, the aggregate demand curve will shift upward and, therefore, level of national income will rise at each rate of interest.

As a result, the IS curve will shift outward to the right. In Fig. 20.5 suppose with a certain given fall in the desire to save (or increase in the propensity to consume), the IS curve shifts rightward to the dotted position IS”. With LM curve remaining unchanged, the new equilibrium position will be established at H corresponding to which rate of interest as well as level of income will be greater than at E.

Thus, a fall in the desire to save has led to the increase in both rate of interest and level of income. On the other hand, if the desire to save rises, that is, if the propensity to consume falls, aggregate demand curve will shift downward which will cause the level of national income to fall for each rate of interest and as a result the IS curve will shift to the left.

With this, and LM curve remaining unchanged, the new equilibrium position will be reached to the left of E, say at point L (as shown in Fig. 20.5) corresponding to which both rate of interest and level of national income will be smaller than at E.

Brian Twomey

That GDP isn’t a very good measure of how we’re doing has been known since the concept was first pushed by Simon Kuznets coming on a century ago. It only includes monetised transactions, includes government at what it costs rather than the value it adds, doesn’t discuss the distribution of income or consumption, only the gross amount and so on and on.

Brian Twomey

Weekly Trades

EUR/USD. Watch 1.1081, above targets 1.1166 and deep caution at 1.1285 and 1.1305. Both 1.1285 and 1.1305 are dropping every week for past months.

Strategy. Long 1.1015 and 1.0994 if seen to target 1.1061. Must cross 1.1037.

Long above 1.1081 to target 1.1166. Must cross 1.1102, 1.1123 and 1.1144. Caution at vital 1.1123.

Note 1.1061 Vs 1.1081. This represents a price gray area and not touch able. Because a break of 1.1081 then EUR higher but failure then EUR much lower. Allow the market to decide the fate of 1.1081.

Certain weeks gray areas exist, other weeks price paths are clear.

Certain weeks, 2 way long and short trades offered as price paths warrant but this week, prices are unclear to 2 ways.

EUR/AUD. Watch 1.6204, below targets 1.6135, 1.6101 and 1.5923.

Strategy. Short 1.6271 and 1.6305 if seen to target 1.6213. Must cross 1.6236 and 1.6220.

Short 1.6204 to target 1.6135. Must cross 1.6169.

See gray area 1.6213 to 1.6204.

AUD/USD. Watch 0.6838 above targets 0.6874.

Strategy. Long 0.6767 and 0.6749 if seen to target 0.6824. Must cross 0.6802 and 0.6820.

Long above 0.6838 to target 0.6874. Must cross 0.6856.

Gray area 0.6824 to 0.6838.

GBP/USD. Watch 1.2741, below targets 1.2665 and 1.2588.

Short 1.2894 and 1.2932 if seen to target 1.2756. Must cross 1.2856, 1.2818 and 1.2780.

Short below 1.2741 to target 1.2665. Must cross 1.2703 and 1.2684.

See 1.2756 to 1.2741.

GBP/AUD. Watch 1.8631, below targets 1.8494.

Short 1.8973 and 1.9007 to target 1.8699. Must cross 1.8905, 1.8837, 1.8769 and 1.8701.

Brian Twomey

Last week’s Short entry at 1.8974, Target 1.8600’s first traded a 62 pip gain to 1.8912 then decided to Trade 105 pips above entry to 1.9079.

As posted, entry was below low 1.9000’s so

Actuality, overbought 1.8974 Traded to higher overbought.

My overbought / Oversold scale is not only far different statistically than the majority but actual overbought Pips was about 70 pips from low 1.9000’s.

GBPAUD Traded to 1.8894. Entry was missed but not Trade profits.

Here’s where no stops, no charts, Break even, add lot and no losses becomes demonstrated reality.

How many traders would’ve taken a loss on a higher GBPAUD, Majority.

How many Traders placed a stop in the as usual wrong place then stopped out for losses.

How many traders saw 105 pips higher as a golden free money opportunity. None.

What did Charts reveal ? God only knows for 1 picture and 10 scenarios.

Add a lot anywhere near 1.9079 result to 1.8894 was 185 pip profit.

Entry from overbought to higher overbought doesn’t matter, just enter and quickly.

Trade to break even was second reality. No losses.

How about hold Trade at 1.8974 to 1.8894 profit 80 pips.

Entry was missed, not profit,  GBCAD offered same scenario,

Brian Twomey

18 Weekly Currency Pairs are sent and traded weekly with specific entries and targets. Traders job is set entries and targets then literally go and enjoy weekly life outside markets.

Last week example, Short GBP/NZD 2.0271 to target 2.0007. Traded weekly highs 2.0296, Weekly lows 2.0001. From 2.0271 to 2.0007 earned 264 pips and all required was set entry and target. This is the way it works for 18 currency pairs week after week.

I’m perfect because my statistics are factored perfectly. We don’t use charts, graphs, stops nor are outside new events a concern to a currency price. Means not 1 pip of speculation is involved in my trades. This separates me from the speculative crowds. They guess, I don’t.

The stats for 12 currency pair trades are located on site. 12 pairs earns weekly easily 1000 ish pips from my stats Feb to July. This means we earn 50% of all traded pips to offer how good are trades.

Daily, 8 currency pairs are traded for interested. These trades are extra pips but a good manner to benchmark weekly trades for those following markets daily. Extra daily pairs not included in weeklies are USD/JPY and AUD/EUR however EUR/AUD remains a standard weekly pair.

A few traders are interested in extra pairs from time to time such as NOK, SEK, ZAR. I assist those traders gladly. I also assist in stock indices, commodities, VIX. Whatever is requested, I assist and those trades are just as perfect as any currency pair trade.

The monthly charge is $300 and $300 includes everything. I don’t charge for extra trades and I’m available nearly 24 /7 throughout the week for questions, comments or whatever. Most enter trades and go as weekly results are always perfect and no need for concerns.

Every now and then a trade may fall off track. Again, never a worry as we add a lot, trade to break even or continue trades to target.

I know $300 is low as many inform but the money covers the time taken to factor all trades. I actually devote much time to ensure perfection. Then comes time in daily trades as 1:30 am New York time begins day trades. Day trades are sent twice daily, 8:30 pm and 1:30 am NY.

Day trades pay about 50 pips per currency pair. On 8 currency pairs, that’s about 400 pips.

All trades run pretty much 24/7 from Sunday to Friday.

Brian Twomey, Contact: [email protected]

My trusted friend, http://tantalumwatches.com  exquisite top brand name Watches, #watches, Pocket Watches, Rings, luxurious, please have a look, Brian Twomey

About the swap and forward transaction

• First circulation rate – BoM closing exchange rate of the previous day
• Last circulation rate – Forward rate

Unofficial Translation

technical matters

Brian Twomey 

XBRUSD This is Brent Or London Oil Expressed in USD

Current Bid 62.55 V ASK 62.70  V Brent Current 63.64

Brent Oil extracted from North Sea and makes up 2/3 of world Oil Deposits

XTIUSD Here’s USD OIL Expressed in USD

Correlates positive to XBRUSD or Brent cause both are priced in USD

Current BID 57.88 ASK 58.05 Spread 1.5 Brent Current 63.20

USDMNT Friends from Mongolia

Here’s MNT TUGRIK or as Mongolia Centralbank the BOM states the TUGRUG

Current 2696.50 MNT Price is auctioned Tuesdays and Thursdays by BOM

BRL is only other Currency known to Price Auction Currencies  excludes Black Box Currencies

Black Box Currencies are many, Central America, South America, North korea

Brian Twomey

Focus for this week’s trades are widest range pairs among the 28 currency pairs. The correct order as follows: GBP/NZD, GBP/CHF, GBP/AUD then GBP/CAD. The 5th and next in line is GBP/JPY.

Trades this week are corrections unless GBP/USD breaks 1.2700’s and GBP/JPY high 137.00’s. If a break is seen at reported levels then GBP/USD will trade to 1.2600’s then 1.2500’s and GBP/JPY easily to 136.00’s and 135.00’s.

As usual no charts, graphs, no stops for none are required due to ability to know entries and targets.

All relevant economic information is known inside prices. Weekly trades by known prices are prepared for market implosions should a crash ever happen.

GBP/NZD.

Strategy. Short 2.0183 and 2.0271 if seen to target 2.0007. Must cross 2.0227, 2.0183, 2.0139 and 2.0095.

Shorts just ahead of big lines 2.0346, 2.0359 and 2.0361. Value of this trade 176 – 246 pips.

GBP/AUD

Strategy. Short 1.8947 and 1.8974 to target 1.8662. Must cross 1.8890, 1.8833, 1.8776, 1.8719 and 1.8691.

Shorts just ahead of low 1.9000’s. Value of this trade 285 -312 pips.

GBP/CAD.

Strategy. Short 1.7077 and 1.7122 if seen to target 1.6852. Must cross 1.7033, 1.6987, 1.6943, 1.6898, and 1.6876.

Shorts just ahead of high 1.7160’s.Value of this trade 225 -270 pips.

GBP/CHF.

Strategy. Short 1.2797 and 1.2836 if seen to target 1.2642. Must cross 1.2759, 1.2721 and 1.2683.

Shorts just below low 1.2900’s. Value of this trade 155 -194 pips

Brian Twomey, Interested in trades then contact [email protected]

Federalreserve Negative Interestrates? No, breaks world dependency to usd

AUD & RBA Interestrates price Opposite USD but AUD exchange rates below to fairly competitive to interest rates

NZD & RBNZ Interestrates priced below USD  but exchangerates priced below interest rates

EUR & ECB Interestrates priced miles below USD, NZD & AUD

GBP & BOE Interestrates Priced between EUR, AUD

USDCAD and BOC Interestrates a Hodgepodge priced around USD and Explains CAD Dead ranges over many months,

expect more of the same as exchangerates priced below Interest rates 

EUR and GBP exchangerates price above interest rates Rates

CHF and SNB lowest interest rates, and Exchange rates priced above interest rates

             Brian Twomey

On hold RBNZ as suspected for not only is the New Zealand economic system stable since the August OCR cut but NZD interest rates failed the 5 Points in 5 day rule posted at fxstreet at the beginning of last year. But again, the monetary aspect is ancillary to the actual NZD price as we knew our trade entries and targets at week’s beginning. And for most, its the main part to count and our trades as usual worked perfectly to entry and target.

Posted at week’s beginning was 4 NZD pairs and GBP/NZD and EUR/NZD. The telling characteristic was the Dead stop for NZD/USD at weekly point at 0.6414. Explains why no or little follow through for the remainder NZD pairs against their respective MA break Points.

To wide wide range NZD/JPY Vs a 51 pip move to our target and 34 pip move above our weekly point for an 85 pip gain. If for example, NZD/JPY Correlates to USD/JPY and not to NZD/USD as its proper position then NZD/JPY transforms to a correlation to a USD currency pair and as a USD currency pair, it won’t trade to its fullest potential. This correlation phenomenon applies to all JPY cross pairs.

NZD/JPY actual weekly volatility is located at 93 pips and we captured 85 of the 93. Viewed from weekly volatility numbers, its customary for us to capture at least 50% of all traded pips on now 18 weekly currency pairs.

Weekly currency and all market prices contain gray area and gry ares are price locations not to trade. NZD/USD Target 0.6398 Vs it weekly point at 0.6414. The gray area from 0.6398 to 0.6414 represents gray area. Price mist inform to next move as long above 0.6414 or short.

For 6 currency pairs and 9 trades, profit was +642 pips and earned quickly by trading the RBNZ announcement. Our entries however was based on weekly enter numbers and most exchange rate numbers were close to RBNZ beginning.

The Trades as Posted

NZD/USD. Long Entry 0.6315 and 0.6306 to target 0.6393. Actual 0.6325 to 0.6393 for +78 Pips. Long above 0.6414 never materialized as NZD dead stopped at 0.6415.

NZD/JPY. Long Entry 68.85 and 68.62 to target 69.43. Actual 68.92 to 69.43 for +51 pips. Long 69.56 to target 70.95. Actual 69.56 to 69.90 for +34 pips. Target 70.95 remains valid.

NZD/CAD. Long Entry 0.8346 and 0.8319 to target 0.8439. Actual 0.8349 to 0.8439 for +90 Pips. Long 0.8469 to target 0.8530. Actual 0.8469 to 0.6493 for +24 pips. Target 0.8530 remains valid.

NZD/CHF. Long Entry 0.6303 and 0.6293 to target 0.6342. Actual 0.6281 to 0.6342 for +61 Pips. Long 0.6364 to target 0.6481 dead stopped at 0.6367. Not trade however the trade remains valid.

EUR/NZD. Short entry 1.7445 and 1.7478 to target 1.7340. Actual 1.6435 to 1.7340 for +95 Pips. Short 1.7313 to target 1.7247. Actual 1.7313 to 1.7247 however EUR/NZD traded to 1.7147. Credit to trade instructions only +66 pips.

GBP/NZD. Short entry 2.0212 and 2.0258 to target 2.0074. Actual 2.0323 to 2.0009. Trade instructions +185 pips.

Brian Twomey

Why follow and trade NZD at current 0.6300’s is because its the lowest exchange rate among all 28 Currency Pairs and only competes with CAD/CHF at 0.7500’s and EUR/GBP at 0.8600’s. As lowest exchange rate, NZD provides best signal and insight to all currency pairs.

A break above for example to wide range EUR/USD and GBP/USD without follow through by NZD warrants caution to a false move higher by wide rangers. Conversely, NZD follows through to the downside.

Consider the distribution

GBP/USD 1.2800’s
USD/CAD 1.3100’s
EUR/USD 1.1017
USD/JPY 1.0900’s
USD/CHF 0.9900’s
AUD/USD 0.6800’s
NZD/USD 0.6300’s

Most important to NZD, the RBNZ is the first central bank to report interest rates and NZD rates are derived and factored based on the Fed’s crucial interest rate release every trading afternoon. The RBNZ sets the standard for all interest rates across Asia and Europe until its time again for the fed to release rates on a 24 hour cycle for the next trade day.

Since the last RBNZ meeting September 29 against the OCR cut to 1.0 in August, New Zealand real GDP for June, March and last December sustained 2.4, 2.7 and 2.8 December and remains higher Vs CAD at 1.6%, EUR 1.2%, AUD at 1.9, JPY at 0.6 and GBP at 1.4.

New Zealand however remains just below USD at 2.6, 2.9 and 2.9 from June to December.

Since June 2015 to present, New Zealand GDP began 2015 at 4.0 and now resides at a healthy 2.4. The August cut as stated from the September statement is expected to sustain GDP at current high levels.

As the September GDP states, the New Zealand economy reached $300 billion for the first time in its history with + 0.7% in Services leading the way from +0.3% in March. Manufacturing and Goods producing industries fell 0.2% in June followed by a 1.9% increase in March.

Inflation at 1.5% is perfectly in line to the 1%-3% target range. Contributing and vital factors to CPI are Oil and Housing.

Housing for New Zealand is common to most nations as Rents are rising faster than Purchase Prices and this phenomenon must attribute to house supply. House Prices rose annually at 2.8% broken down by 1.5% for Wellington, 0.6% for Aukland and 0.2% for Canterbury.

Rental Prices however also rose annually +2.9% and +0.9% in Wellington. Rental Prices for New Zealand is vital due to its 9.2% composition to CPI.

New dwellings rose 7.2% on a seasonally adjusted basis from August 2019 but stand alone houses fell seasonally adjusted at 4.8%. For September, 3,347 consent to build were issued and standalone houses at 1744 competed against 816 Town homes, Flats and Units Vs 611 Apartments and 176 retirement units. Stand Alone Houses at 1744 competes to 1603 for other categories.

The downside to CPI is Oil at minus 0.8% in September and minus 2.9% annually. Oil for New Zealand factors to a higher contribution than previous yearly assessments at 0.2% per quarter.

Since September’s last meeting NZD/USD monthly averages remain at 0.6300’s for October and September while the RBNZ’s TWI also remained stable at 70.53 for October and 70.78 in September.

The 90 day Interest Rate at current 1.15 dropped from monthly average 1.05 in October and remained at 1.15 for September. No change. Not only is 1.15 stable but it fails to meet the traditional 5 day rule for an RBNZ interest adjustment.

Further, 90 Day Futures traded on the Australia ASX Exchange, closed for Dec 2019, March 2020 and June at 98.93, 98.99 and 98.99. No movement nor a message to cut OCR.

Overall New Zealand’s economy, exchange rate and financial system remains quite stable. If the RBNZ assessed an interest rate drop based on exchange rates such as Norges Bank in Noway, then again no reason to move.

The only related factor to lower OCR is the RBA at 0.75 and 1.00 for the RBNZ. AUD as middle exchange rate positioned above NZD traditionally incorporates an interest rate above NZD. This situation will require adjustment as either NZD lowers or AUD rises.

Cut or nor cut, NZD for the week is fully covered.

NZD/USD longer term target is located at 0.6788.

Strategy. Long 0.6315 and 0.6306 if seen to target 0.6398. Must cross 0.6342 and 0.6383.
Long above 0.6414 to target 0.6540. Must cross 0.6451 and 0.6486 and 0.6522.
Short 0.6522 and 0.6558 if seen to target 0.6450. Must cross 0.6486.

NZD/JPY. Longer term Target 72.12.

Strategy. Long 68.85 and 68.62 if seen to target 69.43. Must cross 69.08 and 69.31.
Long above 69.56 to target 70.95. Must cross 69.79, 70.02, 70.49 and 70.72.

NZD/CHF. longer term Target 0.6729.

Strategy. Long 0.6303 and 0.6293 if seen to target 0.6342. Must cross 0.6323 and 0.6331.
Long above 0.6364 to target 0.6481. Must cross 0.6383, 0.6402, 0.6421, 0.6440 and 0.6459

NZD/CAD.
Long 0.8346 and 0.8316 to target 0.8439. Must cross 0.8376, 0.8405 and 0.8435.
Long above 0.8469 to target 0.8530. Must cross 0.8498.

EUR/NZD.

Strategy. Short 1.7445 and 1.7478 if seen to target 1.7346. Must cross 1.7412, 1.7445, and 1.7380.
Short below 1.7313 to target 1.7247. Must cross 1.7280.

GBP/NZD.. Longer term target 1.9900’s.

Strategy. Short 2.0212 and 2.0258 if seen to target 2.0074. Must cross 2.0120,.

Brian Twomey

Credit Monday Morning Macro

FFQ9: “no cut” = 97.86871 & “25bp cut tmrw” = 98.05419, we can work out what mkt px 97.885 implies. That is: 97.885 = 98.05419 * X + 97.86871 * (1 – X), where X = prob% of a cut tmrw. Apply a little grade-school math: X = 8.78%.

At its most extreme this morning, I’d estimate the mkt was pricing in almost 10% probability of a 25bp cut by the Fed tomorrow. How do I figure? It’s based on FFQ9 (August Fed Funds futures).

WARNING: This will involve some basic math.

FFQ9 is the 30-day August Federal Funds futures contract. It’s priced as a simple average of Daily Effective Federal Funds Rate (hereafter “EFFR”) for each day of the month. That rate is published in arrears (i.e. what’s published today is yesterday’s rate) on a daily basis at 9:00am EST by the New York Fed. It’s currently 2.13% (3bps over IOER).

IMPORTANT NOTE: There’s an extremely large number of realistic possible outcomes, including those where IOER continues to drift lower. There are reasons relating to the plumbing of the money markets that make this unlikely, but it’s a possibility. I’m only addressing the one which is most pressing: the market-implied probability of an emergency Fed ease. 

Here’s a table showing how this daily calculation works with 3 different scenarios which I’ll discuss in more detail below. 

No color = days we already know, Orange = future days (we don’t know today’s rate yet), Red = assumes the Fed cuts

EFFR has been trading anywhere from flat vs IOER to 5bps over for the better part of the last 6 months. When the Fed cut rates on July 31, EFFR went down by 26bps – from 2.40% to 2.14%. It stayed at 2.14% for the first two business days of the month, then went to 2.13%.

Because EFFR stayed at 2.14% on Friday August 2nd, that means according to the calculation methodology that the first 4 days of the month (i.e. the non-business days of Sat & Sun) also get counted as 2.14%. Therefore, assuming the Fed doesn’t do anything the rest of the month, the fair value of FFQ9 would be calculated as the simple average of 4 days at 2.14% and 27 days at 2.13%. Therefore price = 100 – rate = 97.86871.

But FFQ9 traded at 97.885 this morning! So what gives?

Clearly the mkt is pricing in some probability of EFFR being much lower that 2.13% at some point this month. But when? Emergency eases are just that: “emergencies”. They’re not telegraphed ahead of time or scheduled. So, we can only calculate probabilities by making an assumption about the day of the cut. 

Let’s take an example. Say the Fed cuts by 25bps on the last Thursday of the month (8/29), for whatever reason. EFFR only falls on the day AFTER a Fed cut (it wouldn’t take effect the same day), so we’d have two days of 2.13% – 25bps = 1.88% (8/30 & 8/31). Under that scenario FFQ9 = 97.88484. Close to current market pricing. But that’s assuming a 100% probability of a cut on 8/29. Markets don’t work in 0% or 100% probabilities. It’s frequently something in between. So then, what’s the probability of the Fed cutting 25bps TOMORROW?

If the Fed cut 25bps tomorrow, that would mean we’d have 4 days of 2.14%, 4 days of 2.13% (both today – which we don’t know yet – and tmrw would be 2.13% along with Monday & Tuesday’s rates), and 23 days of 1.88%. That price works out to 98.05419. Given that, we can work out what the probability assigned to this outcome should be.

If “no cut” = 97.86871 and “25bp cut tmrw” = 98.05419, we can work out what a market price of 97.885 implies. That is:

97.885 = 98.05419 * X + 97.86871 * (1 – X), where X = probability of a cut tmrw.

By applying a little elementary algebra, X = 8.78% or ~9%. 

Now, clearly, there’s a lot at work here. The market has to price in all possible paths of cuts which could theoretically take place on any day (including a weekend, in theory, which would cause EFFR to take effect at the lower rate on the following Monday). As I’m writing this, FFQ9 has ticked back lower, suggesting that the market is assigning less probability to a forthcoming emergency ease. But it’s clearly a fluid situation. SPX another -5% might alter the entire calculus.

Also, EFFR could drift lower relative to IOER. I would emphasize “could”. We “could” also drift higher. The odds of those events are roughly offsetting, to be conservative. We spent the last month trading closer to 5bps over IOER (which, if applied to the scenario for the rest of this month, would imply an even higher mkt-implied probability for emergency Fed action). 

Brian Twomey

Credit to Monday Morning Macro

For those looking for a more detailed way of thinking about “odds”, a brief practitioners’ guide below. 

First, the September “odds”. The simplistic way to think about the pricing of odds for Fed cuts at upcoming meetings is to look at how many basis points lower that rate is versus the current spot rate. Right now, here’s what those rates look like vs the 1-month “spot” rate.

In other words, the September FOMC is pricing in a total of 34.5bps, the October meeting is pricing in just over 2 “cuts” between now & then, and the December meeting is priced for just under 3 “cuts”.

What’s crucially important is this: just because the September FOMC has 34.5bps priced in, that doesn’t mean that there’s a 62% chance of a 25bps cut & a 38% chance of a 50bps cut.

If that were true, then that would mean you’d need to think there was 0% chance of the Fed staying on hold (it’s low, to be sure, but nothing’s 0% until it’s realized) *and* more importantly 0% chance of the Fed cutting by any more than 50bps. Clearly, that can’t be the case either. The Fed has routinely cut by more than 50bps in a crisis (the GFC, for example) and they will again. There’s a better way of doing this, and it involves using the options market.

Using current Fed Funds curves & fwd FRA/OIS, we can fit all possible Fed “paths” between now & the end of this year to current mkt pricing of the Eurodollar & OTC swaption mkt. The resulting probability distribution returns a shape of the fwd OIS curve for each meeting.

Brian Twomey

Credit to Monday Morning Macro

One brief note on methodology: the CME “FedTool” has a similar probability tree but it calculates the odds using binary Markov chains. In a nutshell, this means that they only allow for 1 of 2 outcomes to be altered at a given meeting. If you think the Fed could either stay on hold, cut by 25, cut by 50, or more (which the options market is telling us is a possibility – why else would somebody be wanting to pay anything at all for something like the EDU9 98.50 calls?), then a binary chained decision tree isn’t correct. Look closely at the CME tool, they show zero probability for an “on hold” result. Even in this cynical world of second guessing policymakers, we should know that can’t be correct with more than a month still to go…

3. Funding

One of the aspects of the financial crisis that was so devastating to the credit market was the fact that funding spreads experienced a seizure unlike anything they’d seen previously. Steps were taken in the aftermath to buttress the industry against this happening again, but we still see periodic flare-ups in funding markets that often precede meaningful volatility in other asset classes. The most popular measure of this to follow is the spread between bank borrowing rates (representing unsecured credit) & the overnight Fed rate (representing secured credit): LIBOR vs OIS, also referred to as FRA/OIS (FRA = forward rate agreement). When this spread widens, it indicates funding stress is present. The Dec 19 future associated with this spread is now at its widest levels since early February 2018.

The Federal Reserve tracks what’s called “Term Premium”. The best way to understand this is as a measure of what compensation you’re receiving (once you strip out all the effects of inflation & some other econometric factors) for owning Treasuries. This seems like a sensible measure to watch: if you’re getting 1.625% in interest for 10-year bonds, but the inflation rate is the same – then it’s not really all that much compensation you’re earning in the end.

Currently, we’re at -1.21%. That’s easily the lowest since the Fed started tracking this in 1960.

Brian Twomey

Review

Ricardo Dacosta

September 20, 2019

The BOE’s main overnight rate Sonia , has not only experienced a reorganization since 2016 and in line with the ECB’s transition to negtive interet rates but the new order of the day for all central banks is not only to follow the ECB but all central banks are in transition to offer risk free interest rates. Best method to define a risk free interest rate is 1. to replace Libor and 2. A short term market trade able rate to trade alongside each central bank’s overnight rates.

The FED introduced SOFR and the ECB since October 2 offered STR, the Short Term Rate. Each central bank employs its interest rates according to its own market systems however not much real changes exists especially when interest rates are compared from central bank to central bank. The purpose is to not allow a central bank to gain exchange rate advantage from its competitor central banks.

An additional interest rate such as SOFR applied to DXY adds to a slower price speed and longer times in trading ranges and without breakouts. Today’s central bank meetings against an interest rate change or not only offers barely a 100 pip move and not necessarily in one direction. WTI as appled to USD interest rates moved 2 points in 4 months, from 55.00 to 57. As Central banks such as the BOE perfect new interest rate arrangements, all market prices will begin another slowdown to price speeds and market prices applies to commodities as well as stock markets. I warned to this affect long ago.

Today’s SOFR for example is 1.58 Vs Fed Funds 1.56 V Repo rate at 1.55. SOFR added to the mix employs as additional support or resistance point to exchange rate movements and hinders price breaks and price speeds.

The BOE’s Sonia stands at 0.71. From August 2018 -Nov 2019, Sonia ranged from 0.70 -0.71 and no movement. From 2014 to 2019, Sonia experienced 3 big moves: August 2016, Nov 2017 and August 2018. Sonia AUG 2016 traded from 0.45 -0.20 then November 2017 traded from 0.21 – 0.45. And November 2017 from 0.45 to 70, 0.71 where it remained to present day.

GBP/USD to target lower prices to 1.2600’s, then 1.2703 must break. Higher to target today’s 1.2912 must break 1.2879 and 1.2885. Long term, GBP/USD Targets 1.3300’s.

GBP/CHF at current 1.2700’s Vs GBP/USD at 1.2800’s holds solid supports at today’s 1.2482. GBP/CHF must trade lower in order for a drop to GBP/USD. Current GBP/CHF is overbought and heading lower. Long term target 1.2900′ and very close.

GBP/JPY. To move higher, Weekly 141.31 and 131.76 must break to target long term 143.00’s. Today;s lower target at 138.99 must break 139.42 and 139.24. At 140.29 and 140.38 should hold the ipside targets. GBP/JPY weeklies coincides to EUR/JPY to move higher at 123.85 and 124.94.

GBP/CAD Nothing exciting about GBP/CAD however 1.6881 downside Vs 1.6925 and 1.6936 to move higher to target 1.7077.

GBP/NZD Looking for a greater move back to 1.9900’s.

GBP/AUD is held solid at 1.8504 and a break targets 1.8378 while higher targets 1.8882.

The commonality to Currency markets and among the 18 pairs we trade weekly is long term targets are within 300 pips which means if achieves not only price alignments but neutral currency prices as new trading ranges are firmly established. A settled Price substitutes for neutrality as a settled Price lacks significant movement ability.

AUD pairs as AUD/USD, AUD/JPY and AUD/CHF however are holdouts to the 300 target number as AUD/USD and AUD/CHF targets stand at 400 pips and AUD/JPY 500. AUD/CHF shares the same commonality to NZD/CHF at 400 pips. GBP/JPY is next in line from AUD/JPY at 400 pips while CAD/JPY and GBP/CHF reside as lows to 200 pip targets. Remainder pairs reside at 300 pips however exclusions exist.

GBP/AUD sits within a wide 1.7500 to 1.9400 range and at 1.8700’s is under no threat to break anytime soon. EUR/NZD and GBP/NZD while not fully factored yet stand at traditional wide ranges and also under no threat as well to break anytime soon.

The second Currency Market commonality is a vast majority of the 24 currency pairs trade below or just above 5 year averages. USD/CAD at 1.2992 trades above while EUR/AUD and EUR/GBP trade above 5, 10 and 15 year averages. EUR/CHF threatens its 5 year average at 1.1108, EUR/USD at 1.1334, GBP/JPY at 148.05, EUR/JPY 123.00, GBP/CAD 1.7037.

For most currency pairs, trade below 5 year averages also means trade below 5, 10 and 15 year averages. What trade below averages 5 -15 means is continued compressed ranges and a price in dire need to rise in order to travel to higher ranges for increased volatility.

Currency Pair exceptions exists to the 5 -15 normal trade ranges. GBP/CAD as a wide range yet traditionally neutral currency pair and normally trades between its 5 and 15 year average to signify neutrality but the 10 year at 1.7037 crossed below the 5 year at 1.7714. EUR/JPY 10 year at 123.49 crossed below the 5 year at 127.00. GBP/JPY 10 year at 148.05 crossed below the 5 year at 154.00.

GBPCAD now trades below 5, 10 and 15 year averages while EUR/JPY and GBP/JPY trade below 5, 10 and 15 year averages.
EUR/CAD Neutrality trades between its proper arrangement at 14 to 5 year averages from 1.4461 and 1.4713. USD/CHF above the 5 year at 0.9804 will trade between its 5 and 15 year average at 1,0205. USD/JPY trades neutral from the 14 year average at 103.16 to 5 year at 112.55. GBP/AUD trades neutral from its 14 average at 1.8897 to 5 year at 1.8315.

14 Vs 10 Year averages

If ever a breakout warning existed, its those Currency pairs trading between the 10 and 14 year averages and many fit this order. GBP/NZD’s 14 year at 2.1884 Vs the 10 year at 1.9892. EUR/NZD 1.7623 at the 15 average Vs the 10 year at 1.6637. NZD/CAD 14 year at 0.8283 Vs the 10 year at 0.8588.

10 V 5 Year averages

CHF/JPY trades between its 10 year at 104.88 and 5 year at 114.86. AUD/NZD trades between its 5 year at 107.25 and 10 year at 1.1619.

EUR/GBP trades above its 5, 10 and 16 year averages at 0.8383 while EUR/AUD also trades above its 5, 10 and 15 averages.

USD/CAD trades above all averages and nearest is 1.2992 to then trade between the 5 and 10 averages from 1.2992 to 1.1634. Remainder currency pairs trade below 5, 10 and 15 year averages how neutral prices beckons.

Heading to Neutrality

EUR/USD on a break of 1.1334 would trade between its 5 and 10 year averages at 1.2369. EUR/CHF on a break of its 6 year average at 1.1107 then would trade from its 5 and 0 year average at 1.1868. CAD/CHF on a break of its 5 year average at 0.7553 would trade from 0.7553 to 10 year at 0.8374.

Long term Targets

Long term targets doesn’t necessarily mean today but it offers direction and trade strategy.

USD/CAD 1.2886 or 300 pips however the 5 year at 1.2992 must break.

CAD/JPY 84.56 from 92.00’s and 300 pips.

GBP/CAD 1.6881 then 10 year at 1.7037.

GBP/CHF 1.2912 then 5 year at 1.3373.

EUR/USD 1.1477 but 5 year at 1.1334.

GBP/USD 1.3380 then 5 year at 1.3632

GBP/JPY 143.76 then 10 year at 148.05

EUR/JPY 123.61 caution 10 year at 123.58

EUR/AUD 1.5771 then 14 and 5 year at 1.5229 and 1.5212.

GBP/AUD No target, range currency pair

NZD/USD 0.6788 then 5 year at 0.6959

NZD/JPY 72.12 then 10 and 14 year at 74.57 and 74.59

NZD/CHF 0.6729 then 5 year at 0.6819

AUD/USD 0.7392 then 5 year at 0.7461

AUD/JPY 79.86 then 5 year at 84.01

AUD/CHF 0.7295 then 5 year at 0.7311.

Trade strategy overall constitutes either targets achieve fairly soon and a massive neutrality exists in currency markets or the magic number from 300 drops to a 600 pip target.

GBP/NZD and EUR/NZD targets updates today however both are extraordinarily wide range currency pairs and a formal target is never expected.

Best and easiest trade among all 18 Currency pairs is EUR/AUD as was the sell rally case for all EUR/AUD posts within the past 18 months.

Brian Twomey